CCP §998 Offer: A Settlement Offer with Strings Attached

For those of you who have been involved in litigation
or arbitration, you may be aware of a legal tactic known
to lawyers as a “CCP 998 Offer.” If
you are not, it is a statutory compromise offer which
can be used strategically to force settlement of a case
or effectively change its outcome. This article
discusses the purpose of a CCP §998 Offer and how
it works.

I. Purpose of
a CCP §998 Offer

A CCP §998 offer is a settlement offer with strings
attached, as provided by law. It takes its name
from the code section from which it derives: California
Code of Civil Procedure (“CCP”) §998. The
primary purpose of section 998 is to encourage the settlement
of disputes prior to trial or arbitration. This
purpose is achieved by providing incentives for the party
to whom a CCP §998 offer is made to accept the offer. The
main incentive is to avoid penalties for failure to accept
if the case goes to trial or binding arbitration. As
explained by one court: “The policy is plain. It
is to encourage a settlement by providing a strong financial
disincentive to a party - whether it be a Plaintiff or
a Defendant - who fails to achieve a better result than
that party could have achieved by accepting his or her
opponent’s settlement offer.” Bank
of San Pedro v. Superior Court (1993) 3 Cal.4th 797,
804.

II.How
It Works

A CCP §998 offer may be made by either party at
any time up to 10 days prior to trial or arbitration. CCP §998(b). If
Plaintiff does not accept a Defendant’s offer and
fails to obtain a “more favorable judgment or award,” the
penalties for failing to accept are a follows:

(a) Mandatory Penalties: Plaintiff
loses the right to recover court costs incurred after the
CCP §998 offer was made and must, in addition, pay
Defendant’s postoffer costs. Plaintiff
may still recover preoffer costs if found to
be the prevailing party. CCP §998 (e). These
preoffer costs may include attorneys’ fees if provided
for by statute or contract CCP §1033.5(a)(10).

(b) Discretionary Penalties: In
addition, the court or arbitrator has discretion to order
Plaintiff to pay reasonable expert witnesses fees incurred
by Defendant in connection with trial or arbitration. CCP §998(c).

If a Defendant fails to accept a CCP § 998 offer
and Plaintiff then obtains a “more favorable judgment
or award,” Defendant’s consequences are as
follows:

Expert Fees: The court or arbitrator
has discretion to order Defendant to pay reasonable post-offer
expert witness fees incurred by Plaintiff in connection
with trial or arbitration. CCP §998(d). Defendant
is still required to pay Plaintiff its costs and where
provided by statute or contract, its attorneys’ fees.

The financial penalties for failure to accept a CCP §998
offer provide a strong incentive to seriously consider
such offers. Consequently, CCP §998 offers
are well suited for breaking settlement impasse. The
risk of penalties, as described by one court, “...is
the stick. The carrot is that by awarding costs
to the putative settler the statute provides a financial
incentive to make reasonable settlement offers.” Bank
of San Pedro v. Superior Court, supra, 3 Cal.4th at
804. In other words, a party making a CCP §998
offer must realistically evaluate his or her potential
liability or chance of success and make an offer based
in amount on that evaluation. Otherwise, an offer
that is unrealistic (i.e., too low or too high) is likely
to be beaten at trial or arbitration, in which case the
offeror not only loses, but fails to recover any of the
penalties to which he or she would have been entitled
had the offer been more realistic.

III.Offer Evaluation

Key to evaluating the worth of a CCP §998 offer
is determining whether the judgment or award is likely
to be “more favorable” should the offer be
rejected and the matter proceed to trial or arbitration.
In making this determination, both the judgement or award
(i.e., damages) and preoffer costs are considered. Although
this computation may seem simple, it is often done incorrectly
by parties evaluating a CCP §998 offer because of
a misunderstanding as to what may rightfully be considered
as costs. “Costs” include those items
allowable as costs to the prevailing party as a matter
of law under CCP §1033.5. This section lists
a number of items allowable as costs, the most important
of which for purposes of evaluating a CCP §998 offer
are attorneys’ fees to which a party is entitled
by statute of contract. [CCP §1033.5(a)(10);
See Heritage Engineering Const., Inc. v. City of Industry (1998)
65 Cal.App4th 1435.]

As anyone who has been involved in litigation knows,
in a situation where attorney’s fees are recoverable,
they can be the most costly component of the prevailing
party’s judgment or award. As such, a 998
offer failing to provide for recoverable fees incurred
up to the date of the offer, will likely be disregarded.

Example

The California Supreme Court case of Scott Co. v.
Blount, Inc. (1999) 20 Cal. 4th 1103, is illustrative
of how a CCP §998 Offer can be used to change the
outcome of a case. It involved a construction
dispute between Plaintiff Scott Co., a mechanical subcontractor
to Defendant Blount, Inc. on the San Jose Convention
Center project. Scott filed suite alleging damages
of $2,000,000 for various cost overruns and delays.

Prior to trial, Blount made a CPP 998 Offer for $900,000. Plaintiff
rejected the offer and made a counter demand of $1.5 million. The
parties went to trial.

At trial, Plaintiff was awarded $442,054 in damages. Plaintiff
had preoffer attorneys’ fees and costs
totaling $226,812. Thus, its total award was $668,866,
an amount less than the $900,000 CCP §998 Offer. Since
Plaintiff failed to “beat the offer,” Defendant
was entitled to recover its postoffer attorneys’ fees
and costs of $633,984.00 and expert costs of $247,652,
for a total award of $881,635, Thus, by making the
CCO §998 Offer, Blount changed the outcome of the
case. Rather than owing Scott Co. $668,666, it was
entitled to recover $212,769, the difference of the awards. Blount
improved its legal position by almost $900,000 through
the effective use of the CCP §998 Offer.

Conclusion

A CCP §998 offer can be a useful tool for resolving
a case, but only if the amount of the offer is realistic.
In other words, it must include a serious evaluation of
the other parties’ chances at trial. If that
party is likely to recover his or her attorney’s fees
and costs under CCP §1033.5, the offer should include,
in addition to a claimed damages component, a reasonable
amount for his or her preoffer costs, including
attorney’s fees. If the offer is rejected and
the matter proceeds to trial, any award obtained by the
offeree will likely be “less favorable” than
the offer, thereby entitling the offeror to recover the
above mentioned costs and attorneys’ fees.

The information provided in this issue of "Legal
Notice" is general in nature and is not intended
to answer every question that may arise under different
fact situations and should not be relied on in the place
of professional advice in a given case. If you have specific
questions please contact Sweeney, Mason, Wilson & Bosomworth.